March 11 (Bloomberg) -- Holders of bonds sold by Shanghai
Chaori Solar Energy Science & Technology Co. will consider a
lawsuit to force payment after the company became the first to
default on onshore corporate debt in China.

Investors in the solar-panel maker’s 2017 securities will
meet on March 26, according to a filing to the Shenzhen Stock
Exchange yesterday from China Securities Co., which managed the
offering in 2012. Noteholders will discuss giving the brokerage
the right to participate in restructuring the company and in the
sale of collateral for the defaulted securities.

“Bondholders may get principal and interest if the company
can be restructured,” said Li Ning, a bond analyst in Shanghai
at Haitong Securities Co., the nation’s second-biggest
brokerage. “If a third-party takes over ownership and provides
capital, the company may be able to repay the overdue
obligations.”

Chaori paid just 4 million yuan ($652,000) of an 89.8
million yuan coupon payment due March 7. The default is the
first in China’s $4.2 trillion bond market since the People’s
Bank of China started regulating the industry in 1997. The
failure is stoking speculation more companies may miss debt
payments after the government pledged to let markets take a
“decisive” role in the economy.

Recovery Prospects

Most Chaori bonds appear to be held by the original retail
investors and “it’s less common for retail investors to
galvanize the support, form a requisite group and pose a real
threat, if you like, to the company,” Mark Hyde, Hong Kong-based head of Asia Pacific finance practice at Clifford Chance
LLP, said by phone today. “Deferment of amount due, coupled
with potential additional equity, is likely to be more
beneficial than formally making demands at this stage.”

China Securities will rely on the roster of Chaori
bondholders as of July 5 maintained by China Securities
Depository & Clearing’s branch in Shenzhen, according to
yesterday’s exchange filing.

Liu Tielong, vice president of Chaori, declined to comment
when asked about the filing details by phone today. The company
has outstanding bank loans and no trust loans, he said.

The solar-cell maker’s failure came after China Credit
Trust Co. was bailed out in January on a 3 billion yuan trust
product tied to a failed coal miner. A similar product created
by Jilin Province Trust Co. has missed five payments and the
sixth, which is the last, is due today, Shanghai Securities News
reported last month. The trust company didn’t immediately reply
to e-mailed questions and no one was available to comment when
the company was called.

Trusts

The number of trust products tied to miners maturing this
year will almost quadruple, according to Cnbenefit, a consulting
firm based in the southwest city of Chengdu. Products linked to
property face a 50 percent jump in repayments this year,
according to estimates from Haitong.

“You’re going to see trust products default, you’ll see
wealth management product defaults, you’ll see bond defaults
like we just did, you might even see local government financing
vehicles teeter on the brink,” Leland Miller, the New York-based president of China Beige Book International, said in a
Bloomberg Television interview today. “It’s injecting risk into
the Chinese system. It’s very positive but it might make
investors a little bit nervous in the meantime.”

Sinovel, Star Lake

Sinovel Wind Group Co. had two of its bonds placed on a
credit watchlist by China Lianhe Credit Rating Co. last month,
according to a Shanghai Stock Exchange statement. The company’s
2.6 billion yuan of 6 percent notes due 2016 and sold to
investors at par in December 2011 were trading at 86.35 percent
of face value today, exchange prices show.

Companies with bonds that lack guarantees and have higher
credit risks similar to the Chaori Solar debt include Zhuhai
Zhongfu Enterprise Co., Star Lake Bioscience Co. and Nanning
Sugar Industry Co., Haitong’s Li said last week.

An official at Zhuhai Zhongfu who asked not to be
identified said the company won’t have any problem paying
interest on its bonds this year because manufacturing is normal
and its relationships with banks are good.

An official in Star Lake’s investor relations department
who asked not to be identified wouldn’t comment when called last
week and there was no reply to faxed questions. An official in
the securities department of Nanning Sugar said last week the
company couldn’t answer questions before March 14, when its
annual report is due.

Chaori Solar will seek buyers for its solar farms in
Greece, Bulgaria, Italy and the U.S., the company’s Liu said in
an interview yesterday. Chinese banks that had previously agreed
to provide 800 million yuan in loans if the company faced a
temporary cash squeeze “have no willingness to lend,” he said.